Under quite general conditions, free trade pacts lead to higher average real incomes in every participating country. The argument for this proposition is simple, incontrovertible, and entirely non-controversial among those who have taken a few minutes to understand it. This stands in contrast to the arguments for, say, Darwinian evolution or anthropogenic climate change, which rely on vast bodies of evidence that most of us will never digest. Your opinions on evolution and climate change almost surely rely at least in part on the testimony of experts. Free trade is different. It doesn’t matter what the experts say, because you can check each step in the argument for yourself.
Educated people know this. So when they want to throw up roadblocks in the way of free trade, they don’t say silly and obviously false things like “free trade will make us poorer”. Instead, they say silly things like “Sure, free trade will make us better off on average. But there are still both losers and winners!” From this, they want us to conclude either that free trade is not a good thing, or that at the very least, the winners should compensate the losers.
This strikes me as an extraordinarily dishonest way of arguing, because pretty much nobody ever argues this way about anything else, even though every policy change in history has created both winners and losers. In fact, every human action has both winners and losers. When Archie takes Betty instead of Veronica to the ice cream shoppe instead of the movies, both Veronica and the theater owner lose out. It does not follow that all human actions are wrong, or immoral, or should be discouraged by law, and it does not follow that all human actions should be followed by compensation to the losers. What, then, is so special about free trade?
The problem is confounded by the fact that with free trade, unlike many other policies, the winners are often poorer than the losers. When Americans lose their $30 an hour jobs making air conditioners so that they can be made by $20-an-hour foreigners, the big losers are Americans whose wages fall from $30 to $20. The big winners are Americans who can now for the first time afford air conditioning. Most of those people are probably making less than $20 an hour. (On this point, see also here.)
For those who insist on repeating the old “What about the losers?” refrain, I’ve prepeared a little quiz to test your moral consistency:
- In 1998, a new grocery store opened in my neighborhood, offering better food at lower prices than the old grocery store. This is generally perceived to have been a good thing overall, but at same time it was bad for the owners of the existing grocery store.
- Does this mean that the new grocery store should have been prohibited from opening?
- Does this mean that the winners — i.e. my neighbors and I — should have compensated the losers — i.e. the proprietors of the old grocery store — for their losses?
- In 2005, I stopped going to the barber and started cutting my own hair. My friends think my hair looks better now, and there’s a general perception that the change has been a good thing overall.
- Does this mean that I should be required to return to my barber?
- Does this mean that the winners — i.e. my friends and I — should have compensated the loser — i.e. my ex-barber — for her losses?
- In 2008, Google introduced the Android operating system to compete with Apple’s iPhone monopoly. This is generally perceived to have been a good thing overall, but at the same time it was bad for Apple’s shareholders.
- Does this mean that Google should have been prohibited from developing the Android system?
- Does this mean that the winners — i.e. everyone who purchased an Android, and everyone who got his iPhone a little cheaper thanks to the competition — should have compensated Apple’s shareholders for their losses?
- In 1863, Abraham Lincoln signed the Emancipation Proclamation, ending slavery in the United States of America. This is generally perceived to have been a good thing overall, but at the same time it was bad for slaveholders.
- Does this mean that Lincoln should not have freed the slaves?
- Does this mean that the winners — i.e. the freed slaves — should have compensated the losers — i.e. the slaveholders — for their losses?
- In 2008, Bernard Madoff was arrested and his ongoing Ponzi scheme was cut short. This is generally perceived to have been a good thing overall, but at the same time it was bad for Bernie Madoff.
- Does this mean that Madoff should not have been arrested?
- Does this mean that the winners — i.e. the Madoff victims — should have compensated the losers — i.e. Madoff and his co-conspirators — for their losses?
Scoring: If your answers were mostly “no”, and if you are nevertheless skeptical of free trade pacts, you’ve got some explaining to do.
I could of course expand this quiz. When personal computers displaced electric typewriters, should the consumers who bought those computers have compensated the Smith-Corona company? When you started using Skype, should you have compensated your long distance carrier? Et cetera, et cetera, et cetera.
The same point was made by our consistently brilliant commenter Sub Specie Aeternitatis in this comment on an earlier post:
For example, wide-spread social changes over the last fifty to hundred years have opened up large parts of US society to women, African-Americans, and others. Most economists would argue that the elimination of de jure discrimination against these groups was a positive and liberalizing effect because it allowed, e.g., many positions to be filled by more able women or African Americans. This better matching of talent to positon has undoubtedly increased social welfare and therefore provided a net benefit to Americans collectively. In short, it was a Kaldor-Hicks improvement.
But it was not a Pareto improvement. Nobody ever talks about the losers of this social change. Think of all the marginally competent white male lawyers who were displaced by more able female ones, once they were legally and practically permitted to enter the profession. Or the marginal white foreman of a work crew who–thanks to the civil rights revolution–finds himself displaced by one of his smarter black crew and is demoted to the crew himself. All of these people suffered real harm due the aforementioned social changes. And that is not even counting the strong preferences of the many bigots and chauvinists whose self-esteem was deeply hurt by blacks and women not keeping in their place any more, even if they suffered no direct economic harm.
So I take it to be [an earlier commenter]’s position that the legal changes won by the civil rights and feminist movements were harmful because they did not include redistributive taxes on blacks and women combined with special government benefits available only to white men. And if such a redistributive policy was practically impossible, that just means that equal rights for African Americans and women just are a bad idea.
Enough said.
Steve, I am neither advocating that all policies which are not Pareto improvements should be opposed, nor even that all policies which are not Pareto improvements should be accompanied by the winners compensating the losers. I’m making a more modest point than that.
Here’s my fundamental question: why should it matter if the social benefits of a policy exceed the social costs? My understanding is that the reason why it matters is that if the social benefits exceed the social costs, then the policy can be converted into a Pareto improvement by the winners compensating the losers. So if the winners do not actually compensate the losers, why should we care about social benefits and social costs?
Gene Callahan does a good job of illustrating this issue in his short dialogue here: http://gene-callahan.blogspot.com/2016/03/a-dialogue-between-economist-and.html
If the winner has to compensate the loser, where is the incentive to make improvements which benefit society as a whole(and presumably the winner also, or why would he/she do it?)
Keshav:
So if the winners do not actually compensate the losers, why should we care about social benefits and social costs?
First, if our meta-policy is always to adopt policies that increase overall welfare, and if there are many policy choices to be made, then, with probability near 100%, any given person will be better off than s/he would be under any other consistent meta-policy. (Where “consistent” must be construed to prohibit meta-policies like “Always do what’s best for Keshan”; i.e. it should require that everyone be treated symmetrically.)
Second, we need *some* method of deciding what policies to implement. A big part of my point is that opponents of free trade often say things like “free trade is not a Pareto improvement; therefore I am paralyzed” — but they do not consistently say this about other issues. If you can make up your mind about slavery, why can’t you make up your mind about free trade?
So trade deals benefit some people, and hurt others. Glad to see everyone accept that. So any argument for a particular trade deal must somehow make the argument that the benefit exceeds the harm somehow.
A trade deal is not free trade, but a set of restrictions on trade.
Hillary Clinton has flip-flopped on the TPP. I don’t know her current position. Does the benefit of the TPP exceed the harm? No such argument has been given here.
Donald Trump says that he would renotiate the trade deal with Mexico. Will he succeed in getting a better deal? I don’t know, but these abstract arguments about free trade have very little bearing on the matter.
The reasons for letting you cut your own hair, abolish slavery, prosecute Madoff, etc. are very different from those for passing the TPP. The TPP is all about balancing winners and losers. If the TPP passes, how much will it increase median incomes? Zero? A nickel? A thousand dollars? That needs to be balanced against the harms. If no one can even estimate the gains, then it is probably not worthwhile.
BTW, Google announced its Android phone project before Apple had a publicly announced phone product. Apple copied Google as much as Google copied Apple.
Steve, can you provide more detail on this optimal meta-policy result or tell me where to find more detail? That is very interesting.
In any case, I think the reason that opponents focus on free trade not being a Pareto improvement without redistribution is that proponents of free trade focus on free trade being a Kaldor-Hicks improvement. Opponents of free trade would presumably not invoke Pareto efficiency in response to someone justifying free trade on libertarian grounds. Concerning the abolition of slavery, it is usually justified on the basis of freedom, not on the basis of social cost-benefit analysis.
@Finatic “If the winner has to compensate the loser, where is the incentive to make improvements which benefit society as a whole(and presumably the winner also, or why would he/she do it?)” We’re talking about Kaldor-Hicks improvements, i.e. situations where the winners win more than the loser lose. So even after the winners compensate the losers, they’ll still have money left over. That’s what will give them the incentive to make the improvement.
Yesterday I added a comment that if the benefits of free trade are dispersed widely, but the harmful impacts are concentrated in one area (e.g. Detroit), the harmful impacts can be magnified due to the snowball effect of increased crime, property abandonment, breakdown of mutual support systems (which work when one or two people lose their jobs, not when everyone loses their job), alcoholism and drug abuse, etc. This does not imply that the harmful impacts outweigh the benefits, but it does imply it would be economically efficient to redistribute some of the benefits from the winners to the losers (e.g. through subsidized job re-training programs), to keep the snowball effect from happening.
I don’t think that argument applies to any of Landsburg’s “consistency quiz” examples.
@Steve,
I think you’re misunderstanding the point most people are trying to make in recent threads.
My point can be summarized as follows:
While free trade has lifted hundreds of millions out of poverty, it has decreased the real income of tens of millions. Can we do something about that?
I’m not against free trade (probably none who post here are), but I want to get away from the overly simplistic “ra ra free trade” mantra and have a look at the costs, and think about what might be done about them.
We want to look at doing something about the negative effects of free trade because they appear to have severe,
affecting whole regions of the country, whole strata of society.
Real working class wages in the US are mostly LOWER than 40 years ago, for many people they are A LOT lower. This has caused trememdous damage to the lives of tens of millions of people. Depression, suicide, divorce, substance abuse are on the rise among the white working class – while life expectancy is falling.
If free trade wasn’t a major cause of this depression in wages (and the resulting social decline), what caused it?
This isn’t like a factory closing or one company driving another out of business. And there’s obviously no need to compensate men for the fact that women compete for their jobs because that doesn’t have the effect of impoverishing large population groups.
And what countermeasures should be taken? The most obvious is to improve the ability of the lower classes to accumulate capital.
We need to stop imposing regressive consumption taxes while cutting taxes for billionaires. That’s just so counterproductive because it ignores the fact that from a certain point on, concentratring capital within society leads to large inefficiencies.
You need dispersed capital ownership, or the capital won’t efficiently get to where it needs to be.
Other measures would include financial education and the provision of basic banking services to the poor free of charge.
In very simple terms, why something should be done to ameliorate the economic decline of large strata of the US population:
So we don’t get Trump or someone even worse as president.
Also, of course, the social disintegration of the working class has massive external costs.
I copy in my comment from the previous post:
It is obvious that Pareto improvements do not occur in anything other than simple transactions. It is also fairly obvious that just because Pareto improvement does not occur most people believe that we should not do something. We are generally happy to allow the possibility of weighing up winners and losers and striking a balance.
The 101 argument seems to be that nobody can object to Pareto improvement since nobody is worse off. Kaldor-Hicks is essentially the same as Pareto, since transactions could restore Pareto. Therefore nobody can reasonably object to Kaldor-Hicks improvement. The argument against this is that demonstrating Kaldor Hicks is not enough on its own to stifle reasonable objection. It is possible to have a Kaldor-Hicks improvement to which we may reasonably reject.
We then have to thrash out the details. Since we have hypothetically demonstrated that Kaldor-hicks improvement occurs, so there are more wins than losses, the onus should be on the objectors to demonstrate why this should be objected to.
I am still not certain that LK’s argument about mobile capital and fixed labor does not undermine the Econ101 argument. Is it possible in these circumstances for a particular country to be worse off as a result of free trade? If all the capital buggers off overseas and te people can’t follow it, it seems they could easily be worse off. This does not apply to a new invention, where the capital remains inthe same country.
One thing people need to keep in mind is that since 1960 at least there was never more than 22% of the worker working in manufacturing so at worst it is the the other 80% gain and 22% loose and those folks probably were not the worst workers and are unlikely to end up in the bottom decile but might end up in the upper half of the bottom quintile. So we are talking about a policy that helps at least 80% of the people including almost the full bottom quintile but that might push many in the 2 from the bottom quintile down somewhat. No a bad trade off
https://www.creditwritedowns.com/2012/05/chart-of-the-day-us-manufacturing-unemployment-1960-2012.html
Steve, I get why you are frustrated. You need to look a bit at human nature, and the invisible rules that govern cooperation that we evolved. Specifically, the concept of “fairness”. Consider a few scenarios:
A) Job losses due to technology. If a new widget comes along and displaces jobs, in general people don’t think this is unfair. Why? Well, for one things it affects everyone in the industry, so there are no special snowflakes. Second, there is always the possibility of people in the industry learning the new tools, which are available to all. Third, everyone is already a small scale inventor because humans are inherently lazy, so we are inherently biased in favor of technology. A society that is biased in favor of technology will do well.
B) Job losses due to nepotism. If the boss fires me solely to hire their incompetent child, we generally consider this unfair. Why? For one, part of the spirit of fair competition is meritocracy. We want the best person to have the job. Second, we like there to be a level playing field. If I lose a job because someone is better, so be it. But I can’t become the boss’s child, so if that disqualifies me from having a job, it feels unfair. So again, a society that is biased in favor of meritocracy will do well.
C) Job losses due to international trade. I submit this is much closer to the nepotism scenario of B) than the technology scenario of A). Why? Well, it feels like the playing field is not level. The only comparative advantage of an overseas worker is that they are used to a lower standard of living so they are willing to work for less. It is not based on merit at all, and there is no reasonable way for me to compete. Plus, they may be an an institutional environment that makes it easier for them to do business, for example if the company is allowed to save money by polluting the environment. Again, this makes all our fairness bells go off due to the perceived lack of a level playing field, and the lack of meritocracy.
I used to be much more gung-ho about free trade. But when faced with a simple example of something like the US becoming a net importer of steel while Pennsylvania steel towns decay, I have become more of a skeptic. It doesn’t feel fair at all, and I don’t need to be a Luddite to think so
To take your most difficult point first:
… are you seriously telling me that you’ve never heard of compensated emancipation? Compensating slaveholders for the loss of their slaves is how every other European country and most Latin American countries ended slavery. And note that slavery in those places ended a lot more easily and less violently than in the U.S., what with our massive continent-wide civil war that killed more Americans than all other wars in our history combined. It’s almost as if compensating people for major losses that are a part of society-wide gains is a good way to get them to buy in to the change.
Also, it should be noted that Lincoln indeed offered to compensate slaveholders for their slaves. They just didn’t accept the offer.
Advo:
While free trade has lifted hundreds of millions out of poverty, it has decreased the real income of tens of millions.
That’s an astounding assertion, and I expect it’s false.
Real working class wages in the US are mostly LOWER than 40 years ago,
That’s an astounding assertion and I know it’s false. Would you honestly prefer the living standard of the average American worker 40 years ago to the living standard of the average American worker today? If so, I can only conclude that you haven’t the foggiest notion what life was like 40 years ago.
Steve, can you tell me where I can find more detail on your claim that “First, if our meta-policy is always to adopt policies that increase overall welfare, and if there are many policy choices to be made, then, with probability near 100%, any given person will be better off than s/he would be under any other consistent meta-policy.”?
According to a 2014 study by Pew Research, “in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.”
But that’s just discussing average wages. Regarding the wages of those at the bottom of the income ladder: “Since 2000, usual weekly wages have fallen 3.7% (in real terms) among workers in the lowest tenth of the earnings distribution, and 3% among the lowest quarter. But among people near the top of the distribution, real wages have risen 9.7%.”
True, wages account for only 70% of compensation, and the study cites a cost index from the Bureau of Labor Statistics saying that benefits costs have risen faster than wage costs. So for people who have jobs with benefits, there’s that.
nobody.really:
True, wages account for only 70% of compensation, and the study cites a cost index from the Bureau of Labor Statistics saying that benefits costs have risen faster than wage costs. So for people who have jobs with benefits, there’s that.
Well, that’s a start. Now start correcting for quality changes. How many hours did you have to work in 1975 to purchase the equivalent bundle of services that I get from my iPhone each month? How many hours do you have to work today to get that bundle of services? How many hours did you have to work in 1975 to purchase enough medical care to get the same outcomes that I get today? How many hours do you have to work today to get those outcomes? Et cetera. If you believe that an hour’s work in 1975 purchased a better bundle of goods and services than it does today (and that is exactly the right measure of “real wages”), then you cannot possibly know what life was like in 1975.
@Steve,
are you not aware of the data on wage stagnation/decline?
Check this out:
http://www.epi.org/blog/real-hourly-wage-growth-last-generation/
It’s particularly stark if you look at subgroups – real wages for the lower male quintiles have dropped by around 15% between 1973 and 2012.
It’s even worse if you look at the white male working class subgroup. I used to have a link to some data on that topic (think from the BLS), and it showed that lower white male quintiles had dropped by 30%. I can’t find that anymore – the BLS website it a mess.
@SL:
“quality adjustments” – do you think that inflation adjustments are insufficient?
Sure, you couldn’t buy an iPhone in 1970, but then you didn’t need one, either. Even a cheap car from today is much better than what was available then, but what does that really benefit you if you can’t afford to keep it repaired and gassed up?
There’s a lot of stuff today that wasn’t available in 1975, but that today you NEED to have.
You have to have a computer, you have to have internet, you have to have a smartphone, or you’ll be at a disadvantage both in economic as well as in social life.
The fact is that real incomes for many people have fallen a lot, while at the same time technological progress has added many things you have to have to be competitive.
Excellent post, as always, Steve.
To the list of Steve’s relevant questions I’d like to add another. It’s one that I ask my students every semester:
In the mid-1950s, Drs. Jonas Salk and Albert Sabin made available widely successful and inexpensive polio vaccines.
a. Does this mean that Drs. Salk and Sabin should have been prohibited from developing the vaccines?
b. Does this mean that the winners — i.e., not only Drs. Salk and Sabin (and the pharmaceutical companies that produced their vaccines), but everyone who was saved from the risk of being crippled or killed by polio – should have compensated the losers such as makers of crutches, wheel chairs, and iron-lung machines?
Advo:
The assertion that middle-class and poor Americans have stagnated economically since the mid-1970s is made repeatedly. It has repeatedly been debunked. It is, quite frankly, one of the most historically asinine assertions ever made that is widely believed to be true. I can only guess that it is widely believed to be true only because a handful of aggregate statistics, faultily assembled and carelessly interpreted, combines with an overwhelming wish of many people (left and right) to believe that the market liberalization from the mid-1970s through about 2000 can only have benefited “the rich. But the assertion is completely without merit. If you’re interested, I have several posts at my blog (Cafe Hayek) that deal directly with this assertion:
http://cafehayek.com/?s=1975+sears+catalog
The link just above is only to some of those posts. Also, I encourage you to look at the work of Mike Cox & Richard Alm, and that of Scott Winship.
How many hours did you have to work in 1975 to purchase the equivalent bundle of services that I get from my iPhone each month?
It amazes me how people remain ignorant, or purposefully obtuse, on the dramatic progress made since the 1970s. Who can take an honest look back and think that Americans in the 1970s were better than today, when in the 1970s new houses were 1000 sq ft smaller than today and medical outcomes in the US were worse then than in the third world today. In 1971, when my grandfather died of a heart attack (his third), he received the cutting edge medicine of … bed rest; when my uncle had pretty much the same type of heart attack in 1995, just 24 years later, he received actual medical care and now is alive and well in his 70s, with no signs of dying anytime soon. Sure the cost of the medicine my uncle received certainly was more expensive than bed rest, but I’m pretty sure that cost was more than outweighed by the additional, so far, 21 years of life.
>Real working class wages in the US are mostly LOWER than 40 years ago,
Steve has already alluded to this in his response, but this is only true if you take a very particular definition of “real wages”, which really stacks the deck against improving real wages. To put it simply: how much was a monthly broadband subscription 40 years ago? A smartphone? How about an air conditioner for your home?
The way inflation is calculated seems as if it’s almost specifically designed to ensure that the “real wages” of the average person never increase. In some sense, it’s a minor miracle that we ever see any real wage increase.
To see this spelled out, take a look at this:
http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/guide-method/user-guidance/prices/cpi-and-rpi/cpi-and-rpi-basket-of-goods-and-services/index.html
Let’s compare 2014 and 1974, to get a reasonable estimate of 40 years (I’m not sure if the US equivalent of the ONS shares similar info on its baskets). There are all of the obvious things, like the 2014 basket including “personal MP4 player” and “Tablet computer”, but there’s much more to it than that. Take a look at fruit:
Fruit (1974)
Apples; cooking Apples, dessert; Pears, dessert; Oranges; Bananas; Currants; Sultanas; Canned pineapple; Canned pears; Canned peaches; Canned fruit salad
Fruit (2014):
Cooking apples; Dessert apples; Pears; Bananas; Strawberries; Grapes; Oranges; Grapefruit; Avocado pears; Peaches/nectarines; Kiwi fruit; Organic fruit; Small oranges; Plums; Pineapple; Blueberries; Fresh fruit snacking pot
Processed Fruit (2014):
Various canned fruits; Salted/roasted peanuts; Dried fruit
Is it really fair to say that if you’re able to buy the latter list in 2014 with your wages, you are being paid *just as much* as if you could buy the former list in 1974? How much of the increase in the quality and variety of the 2014 basket is down to free trade?
Well if income is so much better than the statisticians at the BLS seem to think, then I’d like to know why it is that the population group that has experienced this supposedly imaginary decline in its fortunes is exhibiting such signs of social stress.
Why are divorce rates up? And debt? And alcoholism and substance abuse? Why is life expectancy down?
And why has social mobility declined so much in the US? I guess people just don’t understand how good they have it.
http://www.nytimes.com/2012/02/10/opinion/krugman-money-and-morals.html
http://www.economist.com/node/9218127
http://www.theatlantic.com/business/archive/2015/07/america-social-mobility-parents-income/399311/
Don Boudreaux: Your Salk/Sabin example wins the prize. I so wish I had thought of it.
Advo:
Why are divorce rates up?
Largely because people can now afford to get divorced.
And debt?
Largely because people (on the basis of their expected future earnings) can afford more debt.
And alcoholism and substance abuse?
Largely because people can afford more alcohol and drugs today.
Just because people are spending their higher earnings in ways you (apparently) disapprove, it does not follow that those earnings don’t exist.
As for your earlier comment about how I didn’t “need” my smartphone in 1975: I needed it then just about exactly as much as I need it today. I use it almost exclusively so that I can read anything I want, anytime I want, even when standing in a grocery checkout line. For this I pay under an hours’ wages each month. To accomplish the same thing in 1975, when I’d have wanted it just as much, I suppose I’d have had to employ an army of people who could be sent to the nearest bookstore or magazine rack on an instant’s notice, and return in lightning time to bring me my reading matter. How many hours a month would I have had to work for that? And it still wouldn’t have been nearly as good.
Incidentally, how many hours would you have had to work to earn the entertainment-equivalent of 500 TV channels in 1975? Surely nobody “needs” those channels any more today than they did then. But people sure seem to want them.
@Steve,
why is it then that groups that have done better economically have seen those rates decline?
Seriously, your latest post is just a rationalization.
I suppose social mobility has declined because everyone’s happy where they are, right?
Well, let’s start with how many hours people work: Sure enough, circa 1975 the average full-time American employee worked about 1750 hrs/yr., while today she works about 1700 hrs/yr – or less than a 3% difference over a span of 40 yrs
Again, this reflects averages, not the experiences of the working class per se.
And how about the fact that in 1976 people could have worked infinite hours (ok, a year’s worth of hours) without ever being able to acquire an iPhone? Fair enough. Likewise, today’s workers could work a year’s worth of hours and never earn enough to go see a live Baiji River Dolphin, Javan Tiger, Pinta Island Tortoise, Southern Gastric Brooding Frog, Western Black Rhino, in the wild—‘cuz they’ve all gone extinct since 1976. (The animals went extinct. But if you worked constantly for a solid year, you probably wouldn’t be looking so good, either.) In short, any era may have its features that would be impossible to replicate in a different era. Until we get a functioning market in time travel, it will be hard to monetize the arbitrage possibilities.
Nevertheless, putting semantics aside, I share Landsburg’s larger: living standards have broadly improved over time for pretty much every segment of society. If we were to sentence a prisoner to endure the lifestyle of King Solomon, he would be able to win a suit alleging Cruel and Unusual Punishment (though he might want to visit the harem before he filed the suit).
So I share Landsburg’s suspicion that even people who CLAIM to have preferred a prior era are probably misremembering. Yet there’s no accounting for taste, so I entertain the possibility that some people truly would prefer the circumstances of a bygone era: Perhaps an era when your spouse was still alive. Perhaps an era when your religious views were dominant. And perhaps an era when your circumstances were worse from an absolute perspective, yet better than your peers—that is, an era when you enjoyed relatively high status compared to today.
‘Cuz people can afford to die earlier! That explains the rising suicide rate, too!
Or—maybe Landsburg is right about material wealth, but discounts the value of status.
Then again, maybe he doesn’t. Some will recall Landsburg saying that he would not want to be the poorest person in his neighborhood—basically accepting an enormous salary to mow the lawns for all the brain surgeons, CEOs, and professional athletes. (I’ve got that quote somewhere, I know it…!) Why not? I surmise that Landsburg values his status, and would be willing to trade off some material goods in order to maintain it.
Now imagine that you’re a working-class white guy with a high school education: Your dad returned from WWII as a world conquering hero and, without any advanced degrees, went to the factory, joined the union, won the heart of his high school sweetheart, and created a higher living standard than his parents ever imagined. And you can bet, he’d never let any Negro talk back to him!
Yet here you are: You have the same amount of education your dad did, but you can’t keep a job. There is no union anymore ‘cuz there’s no factory ‘cuz it moved to Mexico. When you can get a job, the work is backbreaking. You’re constantly exhausted, and your black boss is always on your back—reminding you that you can be replaced by any of the Hispanic day laborers you see out on the street each morning. So to keep up, you take some meth—you know, just a little, so you can keep pace with those younger guys.
You shacked up with your high school sweetheart after graduation and had a kid. But then she dumped you, joined the military, went to college on the GI Bill–and now won’t even return your calls.
Everyone looks down on you, especially your dad. People ask why you don’t train to become a coder. As if. While logically you would benefit from networking, your shame drives you to withdraw from pretty much all social interactions with anyone who isn’t in your precise circumstances. And with this group, you echo each other’s resentments back to each other. And you bowl alone.
Yet as you live in your dad’s basement, you do enjoy a lot of consumer electronics. Including an iPhone. You have more than your parents ever had at your age. And you have better food; indeed, you’re much heavier than your dad was at your age. And you may even have access to advanced medical treatment at the local clinic.
What you don’t have is your dad’s status.
How many of us would say that the son is wrong to envy the dad? How many of us would be surprised that the son looked upon women with frustration, and upon black and Hispanic workers with resentment? That he became hypersensitive to government policies designed to help members of “disadvantaged groups” which never included him? That he came to see the world as a zero-sum game, in which government was a sinister force aligned with his rivals?
How many of us would be surprised if he voted for Donald Trump—not out of any specific preference for Trump policies, but out of sheer desperation, a desire to re-shuffle the deck and see what new hand he gets dealt?
Yes, living standards have improved in many ways, and computer tech has advanced, but how much of that is due to NAFTA/EU/WTO/TPP trade regulation? I say approximately zero.
Lo, a miracle has occurred in your presence–because people on the upper end of the income scale are seeing compensation levels climbing through the roof! So what conclusion should we draw from that?
Let’s return to the topic at hand: The effects of free trade on income disparities. We observe that the nation’s incomes are stratifying. Landsburg argues forcefully that even people who might appear to be worse off than before are really better off because we need to adjust all the data upward to account for unmeasured phenomena. But surely the same is true for people on the top of the income spectrum as well. Their income, which we can document as high, must actually be stratospheric.
Given this dynamic, imagine you’re confronted with a policy choice: Approve a trade deal that will generate more wealth in aggregate, but would depress the welfare of people in the lower part of the income ladder or 2) reject it, forgo the wealth boost, but avoid harming the lower classes.
Whadaya do?
Advo says that life expectancy is falling among working class whites. I assume he is referring to the recent findings by Anne Case and Angus Deaton. ( http://www.pnas.org/content/112/49/15078 )
Let’s be clear: this finding is only for non-Hispanic whites, ages 45-54, and between 1999-2013. From (at least) 1979 through 1998, life expectancy for this group rose. If it were true that middle-class Americans have suffered economic stagnation from the mid-1970s on, and if this stagnation is the cause of reduced life expectancy, it’s difficult to explain
(1) why life expectancy is falling only for middle-aged whites; (Why not for middle-aged blacks? Or middle-aged Asians and Hispanics? Why not for non-Hispanic whites younger than 45?)
(2) why life expectancy for middle-aged whites continue to rise for nearly a quarter-century after the stagnation first set in.
Wouldn’t all of Advo’s social indicators, if true, also be evident in an economy that has shifted over time from one that required a less technically skilled workforce to one that required a more technically skilled workforce, even in the complete absence of free trade?
Indeed, let’s be clear: US LIFE EXPECTANCY PRETTY MUCH NEVER DECLINES. This is not one of those Dow Jones averages that fluctuates from time to time. So to observe a decline in life expectancy for any group is really weird, and has unleashed a flood of inquiries as to its cause.
What does cause a decline in a group’s life expectancy? War. Famine. Natural disaster. Contagious disease. Chuck Norris. And hopelessness. Unlike in the US, male life expectancy in the Soviet Union did fluctuate from the 1960s on. And with the collapse of the Soviet Union and the rise of privatization by kleptocrats, both male and female life expectancy fell. Under Putin, life expectancy is on the rise again.
So, has a class of white Americans from a bygone era felt especially hopeless?
I’d refer to my thesis about loss of status: By and large, minority groups have seen their status rise throughout this period. Not so for whites—and especially undereducated whites. The study shows that the decline was especially pronounced among those with less education.
One contributing factor to suicide is isolation. Work and family keep people from being isolated. As people retire and family members die/leave, people become more isolated. These factors might explain why old people are more likely to kill themselves than younger ones. (And they are.) So as society ages and the labor force participation rate/church attendance/bowling league attendance declines, we might expect to see more suicides.
I don’t know the patterns for other ethnic groups, but African Americans have historically had low suicide rates. Then again, some people argue that a suicidal black person can often avoid the stigma of suicide simply by provoking an attack from an armed police officer: “suicide by cop.” These deaths would not get counted in the suicide statistics.
Another factor contributing to suicide is the presence of a gun. This would help explain why suicide rates are higher in areas with greater gun ownership. Gun sales have surged since Obama’s election, so this might contribute to the phenomenon, especially among people who feel antipathy for Obama’s policies.
Ok, I’m spit-ballin’ here….
Yup. It’s possible that trade is more a symbol of people’s plight than the cause. And according to one theory, the problems of America’s working class are caused by … high expectations.
Longer thesis: While Americans tend to look upon the 1950s as a norm by which to judge other eras, it was in many ways a wildly bizarre time. Among other things, it was an era in which America’s economic rivals had their physical capital lying in rubble and their human capital lying in graveyards. In an era of huge demand and scarce supply of labor, workers were kings. Or, if not kings, at least they commanded some respect and compensation.
But the 1950s is not the norm of human society. Historically, capitalist societies look more like the social stratification of Downton Abbey than Leave It To Beaver. With the rise of the rest of the world’s productive capacities, America flat-ish economic stratification is simply regressing to the norm of greater disparities.
Protectionism may slow this reversion to the mean—but it won’t stop it. And it might exacerbate it. Tyler Cowen forecasts just this kind of economic disparity in his book Average is Over.
Advo people that contend that real wages have not risen in the last 40 years usually use so tricks to make it look that way.
1. They use family income without adjusting for smaller single earner households.
2. They do not exclude those in school and retired.
3. They ignore non monetary benefits like health insurance.
Also the inflation rate is clearly over stated due to quality changes. Middle class people used to have linoleum floors and counter tops worse than any you can buy today. A used 2000 Toyota with 200,000k miles typical runs better than new 1976 model did and is safer and probably pollutes less and it will go another 100k miles.
Pollution is less so the shared environment is better.
Crimes was higher in 1976 also.
Nevertheless there is a case that too cautious monetary policy since 2006 has made people worse off that they would have been with good monetary policy.
The prospect of “winners” and “losers” resulting from a policy (or policy change) is relevant only when the policy (or change) is imposed by government. In the case of trade, it was the original imposition of barriers that created winners and losers. A subsequent change (e.g., toward free trade) creates winners and losers only because of the original imposition. Free trade — like Archie’s preference for Betty — is a “natural” state of affairs, a voluntary social arrangement, for which the concept of “winners” and “losers” is irrelevant. Those who are disappointed by the outcome (e.g., American steelworkers and Veronica) may like to characterize themselves as losers, but that’s just a ploy designed to entice government to intervene of their behalf.
‘In the case of trade, it was the original imposition of barriers that created winners and losers. ‘
Forget government – if a manufacturing plant decides to move its operation from Detroit to Mexico, there are winners (shareholders, consumers, mexican workers) and losers (involuntarily unemployed US auto workers)
One of the consequences of a welfare state is that losers receive some compensation, and winners generally pay more in tax. It doesn’t amount to a Pareto improvement but it is nothing to sneeze at either.
What Keshav and Callahan both ignore is diversification. They imagine one change affecting one worker, who does seem to pay a high price. But what if there a thousand changes, so the loser in one gains in 999? And there are more than a thousand changes, when the price of a million SKUs falls. The cost and the benefit are both smeared about more widely than they imagine. And the benefits are spread with a skew towards helping those for whom $13 a week on groceries matters, as Steve explains.
To those arguing that really wages fall far short of capturing the real improvement in the standard of living – aren’t you arguing that inflation has been grossly overstated for decades?
By how much?
Let’s look at some very specific, and very critical items, for the time period 1973-Now:
Food.
https://fred.stlouisfed.org/graph/?g=8l2
In Jan 1973, the food price index stood at 43.8. Now it stands at 247.9. That’s an increase of x5.65.
If you include beverages, the effect is even more pronounced (x7.14)
In the same period, the federal minimum wage (which developed similarly to the hourly wages of working class white males over that period) has risen from $1.60 to $7.25. That’s an increase of x4.53.
In real terms, if you’re a working class white male, you can now afford to buy substantially less food and drink than 40 years ago.
The fact that you have a much wider array of exotic foods/drinks to choose from doesn’t improve this situation.
Transportation:
The price index for transporation went up by x4.81
Rent of primary residence:
In 1983: 103.7
In 2015: 299
An increase of x2.88 in price against a wage increase of x2.16 in the same period.
https://fred.stlouisfed.org/series/CUUS0000SEHA
Expenses for clothing are down, medical care and education are through the roof.
So if you’re a white working class male, you can today afford substantially less of the basic necessities of life than you could 40 years ago.
This produces financial stress and leads to the aforementioned increases in alcoholism, divorce etc.
The fact that you now have access to wikipedia and satellite TV is apparently insufficient to counteract the fact that you have a much harder time providing the basic necessities of life to your family.
Advo: You are welcome to defend any position you want with vigor, but you are not welcome to obfuscate. You say that medical *expenses* are up and cite this as evidence that medical *prices* are up. In fact, the price of most medical outcomes has fallen almost miraculously in the time period you’re talking about. (Compare the price of extending a cancer victim’s life by one year, today and 40 years ago.) You say that the price of rent for a primary residence is up, but don’t control for what’s happened to the size and quality of that primary residence. (Remember what kitchens were like 40 years ago, compared to today?)
I’m (just barely) willing to believe that you didn’t know how dramatically medical prices have fallen, but not at all willing to believe that you honestly thought expenditures are the same thing as prices.
I will leave this comment posted, and I will leave all of your future comments posted, as long as they are at least minimally honest. But if you continue this kind of obfuscation, I will start deleting your comments.
Steve,
on medical care, I’m just quoting the official BLS inflation numbers.
And the official numbers say that the prices of medical care have increased far more than the CPI. Not expenditures. Prices.
https://fred.stlouisfed.org/series/CPIMEDSL
I believe you are wrong if you say that overall, medical prices have fallen. I think the opposite is the case.
While you are of course right that in many areas of medicine there have been big improvements, most of what medicine does – the routine, every day care, an infection, a broken leg, a cut, an uncomplicated birth – has actually changed relatively little in quality or outcome over the past decades, but the costs have exploded.
An example: giving birth.
An uncomplicated, routine delivery. The cost of a normal, uncomplicated delivery in the US have tripled since 1996.
This is in stark contrast to the rest of the world:
http://i.dailymail.co.uk/i/pix/2013/07/01/article-2352687-1A9B4610000005DC-56_634x452.jpg
http://www.nytimes.com/2013/07/01/health/american-way-of-birth-costliest-in-the-world.html?hp&_r=0
I don’t think the quality of the service bundle for a routine delivery has gone up by a factor of 3 since 1996, especially since this price explosion hasn’t been mirrored in other countries.
@Steve:
<<<You say that the price of rent for a primary residence is up, but don’t control for what’s happened to the size and quality of that primary residence.<<<
The "primary residence rent" price index adjusts for various changes, in particular for size, structural changes and air conditioning.
It doesn't appear to adjust for the quality/number of appliances, but then I'm not sure that makes a critical difference either in pure price terms or in terms of utility. The introduction of the microwave is much less important than changes which either came before the 70s or are taken into account in calculating the index, like indoor plumbing, central heating or air conditioning.
In any event, the point is that after the WCWM (working class white male) is done paying for food, beer, transportation, rent, medical care, he has a lot less money left now than he had 40 years ago.
He has a microwave, his TV is bigger, he has way more channels and the cancer treatment he can look forward to is much improved, but he has substantially less of what I would untechnically call "discretionary disposable income" – the amount of what's left after you pay for reasonable expected expenses.
I think that's really the key to understanding the WCWM decline.
It's about a stark (perceived or real) decline in financial freedom of choice.
Link to the BLS methodology for adjusting rent prices:
http://www.bls.gov/opub/mlr/2013/article/updating-the-rent-sample-for-the-cpi-housing-survey.htm
Advo: It’s possible I misread your earlier comments, in which case I apologize. I have a very busy day ahead but will come back and reread more carefully.
@Ben Kennedy’s #13 comment:
I see your argument as 180 degrees off. If I have been working for my uncle for the past twenty years making $80,000 a year, and he realizes that he could hire a kid to do my job at $15,000 a year, am I right to say, “but, he’s a kid living with his parents and needs almost no money at all, I have a mortgage and a bunch of kids, how do I compete with him?”
Opening up trade is analogous to undoing nepotism, not, as you described, to creating it. You had a cushy situation because of the lack of foreign competition, now you are no longer entitled due to circumstances that have nothing to do with your merit.
I am basically just trying to argue on the basis of BLS inflation statistics for inflation, which may, or may not, be understated or overstated, but in any event probably not to such a degree as to make them completely invalid.
This discussion has helped me crystallize my thinking on the question of how, exactly, things have gotten worse for the WCWM.
They can clearly afford substantially less of some categories of goods (i.e. Big Macs), but more of some others (clothes). For other categories of goods and services it may be less clear because while the BLS tells us that they can afford less, the BLS inflation statistics may not adequately capture quality increases, and then of course there’s lots of free stuff (entertainment, information) that’s now available on the internet.
But what I now think is undeniable is that after the WCWM 2016 buys his “typical basic necessities basket” (low-end apartment, food, medical care, transportation, clothes) he has much less left in his wallet than the WCWM 1973.
That, I think, is what has demoralized the WCWM so much (and what has ultimately given us Trump).
And, to come back to the initial argument, I believe that this decline in “discretionary disposable income” is at least to a large degree due to free trade.
Advo 46. I think Steve is arguing that although prices may have risen, outcomes have risen even more. If it were possible to pay for 1970’s outcomes it would be much cheaper today than it was in the 1970’s.
It seems possible that the price of the standard of healthcare that is regarded as “normal” has risen, whilst the outcomes have also got better. The standard that is regarded as “normal” is much better.
So from Steve’s perspective, if we could opt for 1970’s healthcare standards we would be paying very little today, and much less than we did in the 1970’s. I am not aware of this kind of offer being made, but assume for now that you could opt for this in your health insurance.
We could get healthcare for very low cost. However they would be recieving healthcare that is very much less good than people currently expect.
Are we to conclude that healthcare is cheaper or more expensive? It now costs more as a proportion of income to get currently available best care. Yet it is cheaper for the old standard of care.
If we argue that it is cheaper, as Steve does, we seem to be accepting that more and more people unable to afford best available care is cheaper healthcare. They may get better health care than they would have in the 1970’s, but an increasing number of people that are cut off from best available seems to indicate that something has gone wrong.
On the 1970’s there was a TV program recently where a family lived for a while as though they were in each decade since the 1950’s. Obviuosly this is only a very very crude way of assessing it, but they felt they were happiest with the 1970’s.
@Pete:
“Opening up trade is analogous to undoing nepotism, not, as you described, to creating it. You had a cushy situation because of the lack of foreign competition, now you are no longer entitled due to circumstances that have nothing to do with your merit.”
Foreign workers are not competition, and that is really the crux of the matter. Nepotism is about rewarding family over merit, so a better example would be my boss fires me from my $80,000 job and gives it so his nephew who is less experienced, put pays him $80,000 as well. Most people would say that the uncle has the right to do it, and I think most people would say that the person that lost their job got hosed.
Specifically, what the uncle is doing is withdrawing your job from the market of “everyone” and placing it in the market of “family”. Presumably if the uncle had many nephews, he would give to the job to the most promising looking one. However, any meritocracy is constrained to just the pool of nephews.
Offshoring is a similar dynamic. Offshore workers simply do no compete with local workers in an ordinary sense. This is made obvious by wage rates. Do offshore workers bid the price of labor to slightly less than local workers? Of course not. They make a lot less. Their wage is set by what it takes to induce them out of whatever foreign jobs they had before, and no more. There is certainly no meritocracy involved, better foreign workers may very well earn less than local ones.
Unless it is considered reasonable that local workers are to relocate their entire families and lives to foreign countries, the notion that local workers compete with foreign workers should be discarded. This makes it similar to the nepotism example of your job essentially being given to someone else, which goes against the spirit of fair competition.
@Harold 46:
According to BLS, the medical care price index has gone up by a factor of 12 since 1973, while WCWM wages have gone up only by about 4.5 times. That’s not spending, that’s the price of a basket of procedures, treatments, pharmaceuticals and medical goods.
That would mean that a WCWM will for his hourly wage get much less in the way of medical treatment than in 1973.
As I said with regard to the standard uncomplicated birth – you go in pregnant, come out alive with a baby. Same outcome as in 1996, MUCH higher price.
https://fred.stlouisfed.org/series/CPIMEDSL
The BLS adjusts for quality. It may, of course, not capture the full quality improvements in medicine.
I could imagine, for example, that it is difficult to capture the effects of better diagnostics. Imagine, for example, that you have a disease called Morbus X that’s untreatable because no one knows what causes it. Now it suddenly becomes treatable because doctors figure out that it was caused by bacterium X and you just have to take some antibiotics.
That is obviously a great improvement for the quality of medical care that’s available for you, but how do you include that in the inflation calculation? Should you include it in the inflation calculation at all?
I don’t think, however, that the BLS statistics are completely off the mark, and in some ways they certainly understate inflation (considering that the government has a vested interest in doing so due to cost of living adjusting for SS etc.).
Advo – good discussion. Just thinking about your childbirth example, it strikes me that “standard, uncomplicated” is obviously an ex post assessment; I would expect that our medical care today is much better at dealing with unexpected complications, and that to some extent all child-bearers end up sharing in the paying for that equipment and training as a form of insurance. I also think we know childbirth is an area where an explosion in malpractice lawsuits has had a particular impact – a problem perhaps, but one of a different nature. And of course none of this would seem to have much if anything to do with trade.
As a side issue to the general topic: How to address quality improvements when calculating inflation–especially regarding new life-saving medical treatments.
To do this calculation, you’d have to include an explicit measure of the value of a life (qualified by whatever additional factors you prefer).
Ponder that health insurers want to see you get out of the hospital quickly–and they’re not that particular whether you leave in your minivan or in a hearse. I have to suspect that this dynamic would result in some interesting game theory problems.
<<<would expect that our medical care today is much better at dealing with unexpected complications, and that to some extent all child-bearers end up sharing in the paying for that equipment and training as a form of insurance.<<<
I've been considering that, but I think that these costs tend to be covered when heroic measures are needed, which is why you then have a million-dollar-birth. It also doesn't explain why any given procedure is 2-3 times as expensive in the US as anywhere else in the developed world.
Also:
Between 1990 and 2013, the maternal mortality ratio for the USA more than doubled from an estimated 12 to 28 maternal deaths per 100 000 births1 and the country has now a higher ratio than those reported for most high-income countries and the Islamic Republic of Iran, Libya and Turkey.2 About half of all maternal deaths in the USA are preventable.2
http://www.who.int/bulletin/volumes/93/3/14-148627/en/
The WHO doesn't state which factors (poor obstetric practices or things like obesity) are bear the primary responsibility for this trend/deficit.
On food my source (http://www.numbeo.com/cost-of-living/country_result.jsp?country=United+States) says $.27 in 1973 and (http://www.walmart.com/ip/Great-Value-Wheat-Split-Top-Bread-20-Oz/10315923) $1.00 today.
Milk 1.36 in 1973, 3.29 today
Roasting Chickens 98 cents per pound Illinois 1978, I saw a picture of one with date 9/28/2013 $1.99/ lb can that be right.
I got no idea where the fed gets that food inflation rate.
Nobody: “health insurers [are] not that particular whether you leave in your minivan or in a hearse”
A rather myopic view of the insurance business
Advo: But who actually pays $1mm? How often does that happen? I would think there are other ‘lesser’ complications that happen fairly frequently to also drive of the disparity. Your NYT article mentions women giving birth at older ages. And malpractice.
There is also an issue of price versus cost — the article says other countries use regulatory controls and price-setting.
Even regarding potential piecemeal ‘excessive’ treatment in the US, is that really comparing apples to apples?
Good weekend all
BTW I believe women giving birth at older ages would tend to be correlated with a wealthier society
also the evidence that I seen points to the increase in Devoice being a wealth effect in that women used to stay with some bad abusive drunks but not they have better option. Alcoholism seems have declined.
https://www.sciencedaily.com/releases/2008/08/080806081449.htm
http://www.nber.org/papers/w8511
“This paper investigates the relationship between macroeconomic conditions, alcohol use, and drinking problems using individual-level data from the 1987-1999 years of the Behavioral Risk Factor Surveillance System. We confirm the procyclical variation in overall drinking identified in previous research using aggregate sales data and show that this largely results from changes in consumption among existing drinkers, rather than movements into or out of drinking. Moreover, the decrease in alcohol use occurring during bad economic times is concentrated among heavy consumers, with light drinking actually increasing in these periods. We find no evidence that the decline in overall drinking masks a rise in alcohol use for persons becoming unemployed during contractions, suggesting that any stress-induced increases in consumption are more than offset by reductions resulting from changes in economic factors such as lower incomes. “
Oh and college is tuition free to low income people, and has been for a long time and with the PPACA health insurance is cheap for income people.
Has Maternal Mortality Really Doubled in the US?
Advo:
But what I now think is undeniable is that after the WCWM 2016 buys his “typical basic necessities basket” (low-end apartment, food, medical care, transportation, clothes) he has much less left in his wallet than the WCWM 1973.
And what I keep saying in response is that your “typical basic necessities basket” is not at all the same basket now that it was then. That low-end apartment, for example, is now *much* morel likely to have air conditioning, dishwashwer, garbage disposal, cable hookup, etc. That medical care can prolong your life by a dozen years if you get a cancer that would have killed you in six months in 1975. As far as clothes — you can get pretty nice clothes at Wal-Mart these days that are priced so low that I can’t figure out how they cover the shipping from China, let alone the manufacture. I guarantee you this was not true in 1975. You are comparing, not apples to oranges, but apples to four-course meals.
Advo, today you can get a $19 cell phone and pay $30/month, many young people no longer get land-line phone. See here: https://www.virginmobileusa.com/#!/cell-phone-plans/data-messaging-plans/overview/
Advo – given my comment above (#36), by what calculus are you teasing out the effects of the numerous variables like technology, automation, domestic trade, and immigration from the effects of trade with other countries and concluding that the latter is “to a large degree” responsible for the trends you cite?
Roger: “I don’t know, but these abstract arguments about free trade have very little bearing on the matter.”
Roger,
Although NAFTA does have some restrictions, for most goods and services it does represent a free trade agreement between the three North American nations. So the arguments about free trade would have bearing on the proposals by Donald Trump to renegotiate NAFTA.
Further, for most goods and services there are no restrictions on what Americans might trade their dollars with Chinese suppliers of goods and services. The arguments about free trade definitely have bearing on proposals by The Donald to impose tariffs on Americans who purchase Chinese goods and services.
Steve, I understand that the goods baskets 1973 and 2016 aren’t the same.
But that matters only insofar as the goods basket has 1. improved in quality and 2. this improvement in quality isn’t adjusted for.
I believe you seriously underestimate the extent to which such quality improvements are captured.
The determination of inflation is a science in itself. There’s a lot of very smart people involved with this who do NOTHING ELSE and whose employer (the government) has an incentive to keep reported inflation down – which can be done by capturing as many quality improvements as possible (and then some).
To stay with the apartment example, the BLS doesn’t just look at the average rent for a 50 sqm apartment in 1973 and in 2016 and call the difference inflation.
That, obviously, would ignore all the quality improvements that have happened in the meantime and would lead to the problems you allude to.
It has a very sophisticated system – which includes interviews with tenants – to capture quality improvements.
The addition of air conditioning, for example, is SPECIFICALLY included in the calculation according to the BLS.
Cable hookups would be captured as utilities.
Since 1990, the BLS is also making adjustments for appliances so yes, the dishwasher and the waste disposal should be accounted for. You can read all that at this link:
http://www.bls.gov/mlr/1990/11/rpt2full.pdf
So when the BLS reports that the rent price index stood at 51.5 in 1973 and at 295 in 2016, that doesn’t at all mean that you can rent a modern apartment for just under 6 times the price as in 1973.
What it means is that you could rent an apartment of 1973 quality for that price (if you can find one).
Specifically for clothing:
The BLS reports that clothing is (in nominal terms) cheaper than 25 years ago. But that’s the only basic needs category for which this is true.
https://fred.stlouisfed.org/series/CPIAPPSL
Every week I buy groceries and my puchases are different every week due to need, want, current sales, or loyalty rewards. With so many available choices of different meats, juices, apples, etc I don’t understand how all these variables can be incorporated into inflation stats.
How many hours would I have to work for the same items? How many of the items existed in the 70’s? How many food choices existed? How fresh were they? How quickly were shelves restocked? How easy was it to pay? How many grocers existed to choose from? How would I have gotten information to know what was on sale at which grocer in which city and what loyalty rewards can be earned?
Personally I think standards of living are way better now than the 70’s. We need to work fewer hours to pay for stuff that’s better or didn’t even exist in the 70’s. And living longer.
@Bordreaux 23:
With your Sears catalog you have captured the precise categories that have dropped in price – manufactured goods, electronics (in particular), clothes.
Other categories have seen enormous inflation, far beyond the wage growth of certain population groups, notably the food and beverage category, but also for example rent.
Example: The Big Mac, often seen as a good proxy for purchasing power.
In 2016, the working class can afford fewer Big Macs than in 1973.
In 1973, min wage got you 2.46 Big Macs, now it’s 1.8.
http://rebrn.com/re/mcdonalds-menu-during-244345/
I am a bit surprised by the opinion people here appear to have of the economists and statisticians working at the BLS (and in other places) who calculate the CPI. These guys are not stupid.
The problem of adjusting inflation for quality improvements has been known for many decades.
Now – consider the setup. There’s a lot of smart economists/statisticians working for the BLS and their employer has an interest in keeping reported inflation down.
So the BLS (and the Boskin commission) go to work and develop and apply methods to adjust the inflation rate for quality improvements. Given that the interest of their employer is to achieve a low reported inflation rate, I would tend to think that where they are making such adjustments, they’re probably not going to dramatically underestimate the impact of quality improvements. The adjustments might, in fact, go too far in many cases.
So when the BLS tells us that the real wages for WCWMs have dropped drastically in the last forty years, I don’t think this blanket dismissal based on the narrow categories of goods represented by the Sears catalog is at all justifiable (in particular because the BLS data acknowledges the lack of inflation in the Sears categories).
It’s just a fact – easily verifiable – that in many ways, large segments of the working class (in particular WCWMs) are substantially worse off than they were several decades ago. They can afford less food. They can afford less transportation (while usually having to drive more).
They can afford less (rental) housing.
And due to quality adjustments, the inflation index substantially understates the problem the WCWM faces. If you multiply the rent of a nice 1973 apartment by 5.72 (the price multiplier for this category), you don’t arrive at the rent for a nice 2016 apartment, you arrive at the rent for a crappy 2016 apartment corresponding to 1973 standards (as quality-adjusted by the BLS).
If you want a nice 2016 apartment, you probably have to multiply the rent by 7 or more. Unfortunately, your wage has only gone up by a factor of 4.53.
So if a WCWM in 1973 spent 40% of his income on food and rent (assuming a 50-50 split), he now has to spend 56.77% to eat and live at 1973 standards. There’s no (significant) hidden quality improvements here. It’s all been adjusted for, perhaps excessively so.
His purchasing power in these two very important categories has gone down A LOT.
So no, it’s absolutely NOT the case that in terms of purchasing power everyone, or even the overwhelming majority of the population in the US, is UNEQUIVOCALLY better off economically than 40 years ago. For large parts of the population it’s a mixed bag.
But even this inflation-based example that already sounds pretty bad understates the problem for a WCWM because living in an crappy, but expensive 1973-style apartment is a serious social step down.
If the WCWM wants a NICE apartment by 2016 standards, he’d have to pay substantially more, and he just can’t afford that.
If we want to construct a representative example, we could imagine a blue collar worker who in 1973 used to live in a moderate apartment and ate t-bone steaks and in 2016 lives in a trailer park and eats chicken (because the price of t-bone steaks has gone up by a factor of 7.5x, a fact that the price index fails to capture fully because at some point beef was substituted with chicken in the goods basket).
On the plus side, he has Medicaid, a large TV and unlimited access to internet porn.
But if we look at the social stress indicators and his voting behavior, it appears that this development has caused a substantial decline in subjective quality of life. This guy is not better off.
As a side note – this decline in subjective quality of life actually somewhat diminishes, in terms of utility, the medical achievement of life extension, doesn’t it?
But surely rental stats are affected by large cities with building restrictions or rent controls?
Certainly. But I’m not sure how that’s relevant.
The vast majority of the country is thankfully not subject to rent control.
The CPI shows the outcome, it doesn’t show what contribution building restrictions have had on inflating rents.
I don’t understand how a rental apartment of a certain square footage can be compared city to city, region to region with so many variables that affect price and come up with one percentage number.
What about all the alternative forms of housing that would be built to avoid rent controls?
It’s done differently. Inflation is calculated by looking at a (hopefully representative) basket of apartments from all over the US to see how their prices change from year to year.
Every once in while the composition of the basket is revised based on a survey.
One downside is that people tend to be risk averse. If a free trade deal would make prices lower by 1% but also mean that 1% of people will lose their job / take a paycut it’s possible that overall the country is richer. However, people may be unwilling to accept a small chance of unemployment for a small increase in consumption as they are risk averse.
Wow! What a fun read.
I think that there’s no way to get around the fact that nobody.really’s comment in #32 is the way of the world, and it’s going to stay that way. It used to be that you could count on a factory job in much of America to provide you with all the direction you need to have a decent life. With robotics what they are these days, not many people are willing to pay anything to someone for moving a lever at the right time for eight hours a day.
I don’t believe that this has diminished the ability for high school educated person to make enough, but I think that it requires more initiative than many people have.
On wealth and status:
My family spent a few years as expats in Tokyo. My dad was a middle manager at a consumer electronics company that paid for the kids to go to school at the expensive expat private school and also paid for the family to have access to the Tokyo America Club. We got to experience more wealth in absolute terms than at any other time in our lives, yet we were poorer relative to all of the other expats than we ever experienced at home in America.
It’s only one case, but from my personal experience in this situation, I will say being absolutely wealthy and relatively poor was WAY better than being upper middle class in America.
@Harold:52
Why?
Most people in the history of the species, including most people alive today, even in wealthy countries, *are* cut off from the best available medicine. If that means that something has gone wrong, it has been going wrong forever everywhere.
In contrast, I’d say that more and more people are getting access to better and better medicine–even if mostly not the very best available at the time–is one of the things gone most tremendously right over the last century or two.
No matter how much our hearts may pull us towards demanding it, giving everybody on earth access to the best medicine currently available on earth is not even a theoretical possibility. Any plan that purports to achieve this end is a lie and–given what one can infer about the character of liars–a pernicious one far more likely to slow or reverse the progress we have achieved rather than even move in a positive direction, much less achieve its Utopian goal.
@nobody.really:32
Splendidly written and I suspect exactly right in a stereotypical way (as any writing trying to explain mass movements in terms of individual psychology of typical individuals necessarily has to be). [Also, and I’m being persnickety here, the timeline seems to be a little off. How many 2016 Trump voters live in the basement of their 90-100 year-old WW2 vet dad?]
However, all you have demonstrated is a plausible theory for why some (or many) people vote Trump. Nothing in that theory suggests that our gracious host (and the entire sane part of the economics profession) is wrong when it says that international trade on net enriches both countries, or that he should cease opposing Trump-style protectionism.
@SSA 80:
>>>>No matter how much our hearts may pull us towards demanding it, giving everybody on earth access to the best medicine currently available on earth is not even a theoretical possibility.>>>
That is of course correct, but we could improve greatly upon the way things are currently done in medicine, even without spending additional resources.
The best example is the new Hep C medication Sovaldi.
A treatment course with Sovaldi costs $84,000. The US has about 6.5 million people infected with hepatitis C.
Despite the side effects of Sovaldi/Ribavarin treatment, the medical treatment guideline for chronic HPV C recommends curing pretty much all of them, now.
Unfortunately, given the huge price tag, this would cost 546 billion dollars. And that’s only the US. The EU has another 10 million or so hepatitis C sufferers, the rest of the world another 100 million.
Due to the high price tag, only a tiny percentage of sufferers are treated (until the patent runs out).
The current approach seems to be to monitor patients deteriorating liver conditions (through biopsies, among other measures) and resort to Sovaldi only when they demonstrably start developing cirrhosis.
This is just retarded. The patent should be bought out by the government at an appropriate price (granting to the producer the expected profit, appropriately discounted). Virtually everbody could be cured, and we would save a lot of money on liver biopsies and whatnot. Bizarrly, there seems to be no public discussion of this solution.
Sub specie. Your comment is the crux. Lets not get bogged down in the extent that healthcare is better now – that is just an example.
Lets assume for the sake of argument that the premise is correct. Over time nearly everybody can afford basket of goods that is better than in the past. Let us also say that more and more people are unable to afford the “normal expectations” of civilised life.
In one sense it is valid argument that they are better off. In another I think it is also valid to argue that something has gone wrong.
It is one thing to lack something you do not know could exist, such as an iPhone in the 1950’s. It is quite another to lack something that you see others enjoying every day and are excluded from enjoying yourself.
Sub cpecie: However, all you have demonstrated is a plausible theory for why some (or many) people vote Trump. Nothing in that theory suggests that our gracious host (and the entire sane part of the economics profession) is wrong when it says that international trade on net enriches both countries, or that he should cease opposing Trump-style protectionism.
No, but it suggest why using economic argument has no effect on the outcome. Witness Brexit. You come up with valid uncontroversial arguments but if voters simply say “I don’t care, I have had enough of experts” there is failure to affect the outcome for the better.
I don’t know what the answer is. At lest part of the answer must be to educate people, as SL does very effectively. You must use the best weapons you have. But if people refuse to be educated by rejecting the opinion of experts because they are experts, presumably preferring to rely on the opinion of the stupid and ignorant, you must resort to other means to be effective.
Floccina:
You’re comparing the average price of bread in 1970 to the bread price of bread at the low-end today.
That’s obviously not a valid comparison.
And before someone says “well if someone doesn’t buy the cheapest bread available at Walmart it’s their own fault” many people (in particular in poor areas) live far away from the next Walmart/supermarket and either don’t have a car, or lack sufficient cash to make a long drive for shopping there economical. So they shop at the next convenience store, where prices are much higher.
This whole debate about inflation reminds me a bit of the global warming debate.
“I’ll just dismiss what the experts tell me based on these three anecdotes here, without bothering to learn too much about what the experts base their opinions on.”
The global warming deniers can at least base their out-of-hand dismissal of the science on the idea that the climate experts are incentivized to overstate the problem of global warming, whereas the incentives of the BLS experts go towards understating inflation, not overstating it.
There are a substantial number of experts who believe that the CPI in the US is indeed systematically understated.
E.g.:
http://www.nber.org/papers/w12311.pdf
@Advo:81
I claim no expertise on this issue, but unless there is some missing factor, something like what you propose is obviously the correct answer and a true Pareto improvement: everybody gets Sovaldi and the patent holder gets substantially more than currently projected (albeit substantially less than $546b).
@Harold:82
But, short of establishing a North Korean-style communism in which suffering is nearly universal and the luxury of the elite is ruthlessly hidden from the populus, it is impossible to have a society in which nobody enjoys on a daily basis something another cannot have.
I am among the most fortunate among the richest large nation on earth at a period in time when it is richer than it has ever been, so I can have almost anything money can buy. But not all. I know of others who daily enjoy their 300-foot yachts, their private jets, their country estates of a size and opulence which put mine to shame, and so on. I’d like those things, or at least give them a try, but I can’t because I am too poor.
Similarly, I am fairly confident that my descendants in a century will enjoy luxuries, pleasures, and conveniences of which I have not even yet dreamt. Surely, if they reflect back on my situation a century ago, they will struggle to understand how somebody deprived of all these things could possibly have managed to make it through the day without despairing.
Yet, it seems to me that comparing one’s situation to the —the ceiling of which seems to be only knowledge of others’ better fortune or one’s imagination—is a recipe for permanent bitter unhappiness which is impossible to alleviate by any plausible measure. That doesn’t prove that this attitude is wrong, but it moves me towards not wanting to try it.
@Harold:83
Actually, I was in favor of Brexit (and independence for almost everybody else who wants it) on the basis of an economic arguments, including the Tiebout model and Public Choice considerations.
Also, that “I don’t care, I have had enough of experts” quote, said by Michael Gove (the de facto leader of the Brexit movement, an Oxford honors graduate, attorney, and UK equivalent of the US attorney general, not some disgruntled Brexit voter caught by a cameraman), has been widely and dishonestly used by the press.
In fact, Gove continued Clearly Gove was attacking experts from certain pro-EU groups who he thinks have a bad record, not expertise in general. However, the Bremain press looking for the perfect example of anti-intellectualism by Brexiters gave the truncated quote enormous play.
And it worked. Searching Google News for yields 1080 hits. Searching Google News for yields 3 hits.
@Advo:85
God bless progressive city councils who protect their poor and minority constituents from the scourge of Walmart, like the noble DC city legislators who shuttered plans for two Walmarts in poor neighborhoods by a massive hike in the minimum wage.
<<<God bless progressive city councils who protect their poor and minority constituents from the scourge of Walmart, like the noble DC city legislators who shuttered plans for two Walmarts in poor neighborhoods by a massive hike in the minimum wage.<<<
It isn't immediately obvious why a minimum wage hike might make any particular Wal-Mart branch uneconomical, unless the competitors of Wal-Mart are exposed to a substantially lower degree to such minimum wage costs (Amazon?). Wal-Mart's competitors in such depressed areas tend to be mostly companies with a higher staff/sales ratio (7-11) and generally don't pay (significantly) more than Wal-Mart.
Did Wal-Mart state the minimum wage hike as a reason or are there any other grounds for assuming that this is what prompted their decision?
With regard to Sovaldi – I think this may be the first case where within the US (and other developed nations) a medicine is so expensive, and the number of people that would benefit is so large, that it is not affordable to treat more than a few percent of the patient population.
Sovaldi represents something new – a breakdown of the system.
I suppose the pharmaceutical patent system has in the past relied on a certain ethical restraint on the part of the patent holders.
That has gone by the board in recent years, and the result in the case of Sovaldi is that until the patent runs out in 2029, in the US alone, you’re going to have millions of avoidable liver biopsies, hundreds of thousands of avoidable cases of liver cirrhosis (which can mostly hopefully be arrested before they kill the patient or require a liver transplant) and thousands of avoidable deaths due to liver cancer.
Sub specie. On Gove, you can’t get him off on that technicality. He failed to come up with any experts that said the opposite. If you are going to reject expert opinion because the institution has an acronym you will soon end up back in the cave. His argument that they got things wrong in the past is spurious, as you know. It is much easier to predict the effect of a particular change than it is to predict the future. Would he reject them saying raising the minimum wage would cause unemployment because they filed to predict the 2008 crash? No, of course not. And they were not saying what is best, they were describing what would in their opinion be the effect of particular choice. It is up to the voter to decide if that is for the best. It is perfectly valid to vote leave when you have considered the experts opinions is you think that the benefits are worth the economic costs. It is not valid to reject the experts opinion because you don’t like the answer. Gove had then to fall back on conspiracy theory that every economist had a vested interest in maintaining membership of the EU so could not be trusted.
Professor Minford was about the only economist saying the economy would be stronger. That was based on introducing unilateral free trade. Others dispute his conclusions, but that is almost beside the point since his prescription will never come about. Minford acknowledges that this would reduce UK manufacturing. If you think many of those voting for brexit was on the basis of removing tariffs from Chinese steel I think you are deluded. Unilateral free trade is a political impossibility and will not happen.
On the matter of wealth disparity.
“it is impossible to have a society in which nobody enjoys on a daily basis something another cannot have”
I never suggested otherwise. People are quite happy to accept a certain level of disparity. Nobody expects to enjoy things that are not yet invented, so we feel no resentment. The significant disutility from feeling excluded needs to be included. You perhaps think that this disutility can be removed simply by pointing out that they can now afford 1980’s healthcare and have internet porn, but that is probably not going to work.
Have a look at the interview and see if you think Gove has strong arguments
@harold:90-91
I concede that this was not a good argument.
Economics can give us some insight into the direction (and sometimes even magnitude) of the effect of some policy. But overall national economic aggregates are constantly subject to so many different effects that one cannot reliably predict their direction. A good policy may be followed by negative changes; a bad policy by positive changes. Only truly catastrophic policies can guarantee the overall outcome.
So, the line about “economists are useless because they failed to predict the ’08 recession” is stupid and in so far as Gove was pushing it to discredit economists generally, he was blowing air.
That said, a number of prominent British economists did use their position to predict imminent, economic disaster should Brexit pass. In so far as Gove was criticizing the false confidence of these people, he was not wrong. None less than *Paul*Krugman* makes the same criticism. http://krugman.blogs.nytimes.com/2016/07/02/more-on-the-short-run-macroeconomics-of-brexit/
@Harold:
> Nobody expects to enjoy things that are not yet invented, so we feel no resentment.
Why shouldn’t they? Expecting to have things not invented and is only very marginally less reasonable than expecting to have all things the Sultan of Brunei has.
I take reports that more people are inclined to the latter than the former folly at face value. Could that have political consequences? Sure, it could.
But should the mere fact that many people exhibit such folly influence any seeker of the truth on iota, either to change their own position or to cease to argue it to whoever will listen? Surely not.
<<<Would he reject them saying raising the minimum wage would cause unemployment because they filed to predict the 2008 crash?<<<
It's not like no economists failed to predict the crash. Some more or less did.
The best example is Robert Shiller, of course:
http://www.reuters.com/article/us-usa-economy-housing-study-idUSN305550420070831
Then there was this article in the economist, which should have frankly clinched it for any reader:
http://www.economist.com/node/4079027
Or this article from the CEPR, unfortunately no longer available, which explicitly drew the comparison with Japan:
http://boards.fool.com/homebuying-in-a-bubble-the-fast-way-to-poverty-19496551.aspx
But I also remember Paul Volcker, for example, who on multiple occasions warned of the grave global macro imbalances and specifically also of the US housing bubble.
Mostly, though, you basically had to read between the lines.
There very few economists willing to come out and say that true disaster was brewing.
What you had instead was cautious analysis such as this piece:
https://www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer01.html
…which failed to spell out the obvious implications of the "return of the credit cycle", but which sounded really obvious if you considered as backdrop the most spectacular credit and real estate bubble the US (and, at least in terms of its geographic breadth, the world) had ever seen, the massive decline in lending standards in the US housing market (which was obvious at the time even at a cursory glance) and the enormous increase in leverage within the financial system (which I was unaware of at the time insofar as the banks were concerned, though I expected, without much evidence (merely based on expected behavior patterns) that what later became known as the "shadow-banking system" was overleveraged).
I suppose economists heeded Gross' advice, who at the time was writing excellent commentary (less so today):
"…forecasting Armageddon is a tricky business. Mankind’s indominatably optimistic spirit has a habit of postponing foggy days until the gloomster’s warnings and ultimate sanity is called into question. Crying wolf must be done infrequently and with relatively precise timing to be effective."
Intellectually, it was the most fascinating time of my life for me, as I tried to square the seemingly obvious (to me, given the historical record) outcome of such a bubble with the complacency of the vast majority of economists and policymakers. It was quite a journey between late 2003 (when I started shorting homebuilders, which I gave up sometime in 2004) and late 2007, when the stock market reached a new high even as the wheels were coming off the wagon in a rather obvious fashion (Citigroup, in particular).
I still remember the moment of my intellectual capitulation some time around that new stock market high. After years of running around with my hair on fire in expectation of the big meltdown, I finally admitted to myself that I had been wrong. The bubble had popped, and the world hadn't ended.
The new SPX high was proof of that. Given the fact that the bubble was unravelling and the credit crunch was already well underway (and much discussed by the public), there was no way all those economists and super-smart hedge fund managers could be STILL missing the extent of the problem. I had simply been wrong all along. There would be no catastrophe.
After years of worrying, this realization was accompanied by a sublime feeling of serenity. It was a bit as if I had been tensing all that time and now I could finally relax. Everything would be well (or at least not nearly as horrible as I had firmly expected).
Soon after I had reached that conclusion, everything REALLY started to fall apart. It was actually quite funny.
Sub specie. One can certainly argue that world where everyone gets wealthier is n improvement on one where that does not happen. On can also argue that a world where the gains do not leave many behind is even better, even at the cost of a slight reduction in overall wealth
Damn right I expect it! Where’s my flying jetpack?
@Harold:94
I don’t have any strong normative views on proper distribution of wealth or income, but if I adopted yours, I’d have to become even more of a partisan for free trade and globalization: http://voxeu.org/article/global-income-distribution-1988 (
Note the graph showing global income growth in every single percentile, with about 75 percentiles having larger growth than the top percentile. Every egalitarians’ heart must also beat higher at the highly effective redistribution of growth to the second through seventh decile, the global middle and working class, from the top two deciles, the global upper class, who don’t really need any more money.
Free trade, is there anything it can’t do?
@Advo:94
The secret to being know as a sage with the power of foresight is to predict early and often. Then, whenever one of your predictions comes true, you publicize that one.
I know this to be true because it was said, under oath, at a cross-examination, by a highly respected expert economist in one of my cases. Even though he was on the other side, I could not help liking him for that. That said, I don’t think his candor helped his case.
Expressing grave concerns about certain issues that might cause doom is cheap. I can do that all day long, every day. If doom doesn’t strike, well, maybe the time has not come yet. Or other, positive factors (mentioned in a footnote somewhere) just overcame the forces of doom. And if you get really lucky and doom strikes, you are the genius who alone foresaw and warned us of it!
I’ll take claims of economic clairvoyance more seriously if you show me an economist who publicly bet a substantial sum that a specific, but widely regarded as unlikely, scenario occurs and won. Even better, show me an economist who moved all of his own portfolio out of equities at the pre-crash peak.
In fact, bring several such examples, because one or two I’d sooner attribute to luck.
<<<In fact, bring several such examples, because one or two I’d sooner attribute to luck.<<<
I think the number of examples is less significant than the question of whether that person got the reasoning right, whether they understood what was going on.
Best example I can give you is Robert Shiller.
I don't know about his equity portfolio, but he published three books titled "Irrational Exuberance". The first one predicting the tech bubble just before it collapsed and the second one in 2005 predicting the end of the real estate bubble. In 2015, he published the third edition about bonds, but I haven't read that yet. I guess it's probably a good idea to read it.
https://en.wikipedia.org/wiki/Irrational_Exuberance_(book)
The thing about Shiller is that he isn't doing anything special at all. He doesn't have any obvious special insight. All that he does is assume that "this time will not be different".
That's what I did as well. That shouldn't be hard, should it? But then why is it that people tend not to anticipate the fact that speculative mania #10323 will end in tears?
My theory is that there is some biological human herd bias at work. The human mind works on the inherent assumption that what everyone does is the proper way of doing things. That commonly accepted practice makes sense. There is an instinctive grasp of social norms and rules, of how things are done, and a HUGE bias to do and say things to fit in.
Not to seem odd, not to stand out.
This has big advantages – life is much easier if you fit into society (Darwinian advantage) and in the vast majority of cases, doing things the way everyone DOES make sense.
But not always, because sometimes what everyone’s doing is really, really stupid.
And then there are some people who have some kind of dysfunction like Asperger's or ADD which is characterized by an inability to instinctively adapt to society's norms. Even when such norms are perceived, there is no inherent impulse to follow them. Sure, everyone's doing it like this – so what?
I guess you could say that those people are intellectual offroaders.
It has advantages and disadvantages. Other people get to their destination more smoothly, you have a much more rocky ride and you may end up in a ditch, but sometimes you end up in very interesting places.
Of course lacking guardrails on your intellectual roadmap is only part of it. At the same time you need broad knowledge, analytical ability (and the discipline to apply it systematically) or you’ll just end up going off into random directions. There’s plenty of undirected crazies on the internet who’re right the way a stopped clock is, like e.g. Peter Schiff, who saw the collapse of the housing bubble coming but decided to be long speculative gold miners and commodity stocks. A single glance at the charts for the 1973/1974 could have told him that that was a bad idea.
The movie The Big Short grasps this concept fairly well: only the “outsiders and weirdos” got it.
Sub Specie 97. Your post raises the interesting point that has come up here before – how much do we case about the welfare of people in other countries?
In my earlier analysis I was looking only at one country. As with immigration, if we include the benefits to the immigrant we will end up with a larger gain, but rightly or not, that is not what people often care about.
So for those in the USA or UK, I am currently only thinking about existing citizens.
@Harold:101
Fair enough; I am not going to tell you what utility function you must seek to maximize. If you are going to discount the utility of people living in other geographic locations, even down to 0, that is the nationalist’s prerogative.
What I do object to though is the attitude embraced by many self-declared trans-national, cosmopolitan, all-the-world-is-one, Social-Justice-demands-redistribution-to-the-Global-South progressives who, the second the issue of trade comes up, immediately jump on the welfare-of-foreigners-is-irrelevant bandwagon.
Has anyone ever done an analysis of the effects of free trade on the development of commodities prices and on externalities like pollution?
Yes, we get cheaper manufactured goods from China, but at the same time industrializiation in the emerging markets has greatly accelerated climate change and driven up commodity prices the US must pay.
I can’t remember reading anything about anyone ever addressing specifically from a US-centric viewpoint.
@Advo:103 “Yes, we get cheaper manufactured goods from China, but at the same time industrializiation in the emerging markets has … driven up commodity prices the US must pay.”
It probably has. But that is merely a pecuniary, not a genuine, externality. For every dollar a commodity buyer pays more, a commodity seller receives an additional dollar. The net effect on third parties exactly offset. That is the reason the common law for many centuries has not recognized harms to third parties caused by competition, even though these harms are real.
Even if you only care about the US, it is far from clear to me that a general increase in commodity prices is harmful. The United States is amply endowed with natural resources and other commodities and exports many of them. The case for harm may be cleared for countries like Japan which are poor in natural resources.
Advo@103
I recall that the US has some prohibitions on exporting natural gas without the President’s consent. Even as the US supply has grown, I sense a general consensus that a president benefits more from having low-cost energy in the domestic market than from having wealthier petroleum exporting companies. Thus, the president has an incentive to make a decision that conflicts with the lessons of classical economics.
Nevertheless, the US at long last began exporting natural gas this February.
I keep thinking that MH17 wouldn’t have been shot down by the Russians and that ISIS wouldn’t exist (or be much smaller) if there hadn’t been free trade.
Without the massive global economic growth spurred by free trade, oil prices would have been substantially lower over the last decade+.
It is the oil revenues that have enabled Putin’s military adventures; Saudi oil billions spread the cancer of extremist Islam; and ISIS is relying to a very large degree on illegal oil sales.
China is building up its military, throwing its weight around in the region, looking into ways to counter US military supremacy.
Of course free trade gives China an enormous incentive not to do anything that might interrupt trade flows in the region and would lead to something like an immediate 30% GDP decline.
But military strategists always much prefer it if an opponent lacks the military capability to do stupid things in the first place, rather than relying on the opponent to always do the reasonable thing…
That the cost of a Big Mac in minimum wage hours has risen is very interesting to me because:
1. Think beef have risen slower than minimum wage: http://www.nationalchickencouncil.org/about-the-industry/statistics/wholesale-and-retail-prices-for-chicken-beef-and-pork/
2. McDonald’s seems not to be more profitable. http://money.cnn.com/2015/04/17/news/companies/mcdonalds-franchise-unhappy/ and the Corp. does not seem to be make significantly more profit in the USA operations.
3. Much of McDonald’s labor costs are from the same low wage workers that we are talking about.
If you have children,you do get more from McDonald’s today because they have those play areas. Also you now get free refills of soda.
Nevertheless it is interesting though it is of course only one product.
BTW a couple thing most of us would agree on that might help narrow consumption in-equality (I hope that we can agree that’s more important than income or wealth inequality) are easing up on professional license restrictions and allowing more building.
” immediately jump on the welfare-of-foreigners-is-irrelevant bandwagon.”
Of course the welfare of foreigners is not irrelevant per se, but it is irrelevant to that particular argument. One argument at a time or I get confused.
Of course, when we do move onto other countries, we must deal with the belief that exporting jobs is harmful to the new employees.
I had mentioned the Big Mac specifically because it is generally seen as a good proxy for purchasing power in general (at least when comparing currencies), and tends to align well with measured inflation.
http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-7
@Advo
https://www.washingtonpost.com/news/monkey-cage/wp/2016/05/26/when-the-legend-becomes-fact-print-the-legend/
“Mortality rates for middle-aged white men have been going down, not up”
BTW Checkers or Rally’s is more like the Mcdonald’s of the 1970’s than today’s McDonald’s is. I did not check the prices at Checkers or Rally’s though. Also at some point we switched from median income to minimum wage income. Fair enough though, I still contend that inflation has been over stated and that minimum wage today buys more than in the 1970’s. https://en.wikipedia.org/wiki/United_States_Chained_Consumer_Price_Index
The reason why I had used the minimum wage was because it was similar in its development to the white working class male (WWCM) wage which unfortunately I have been unable to find again on the BLS website.
WWCM have seen a large decline in purchasing power over the last four decades, hence: Trump.
What (if anything) should be done about that is a different question.
What should probably not be done is hit them with an additional consumption tax in order to finance further tax cuts for the rich.
I like the idea of a society where policy is decided on the basis of creating the largest possible pie. It sounds great. But I suspect that, because these decisions would be made by humans, there would be relatively high risk of bias in the way the pie was expanded (there are several ways to make a pie bigger). I.e. I’d be worried that rather than the winners and the losers being different groups of people who on average are doing better, systemic bias may make particular groups more consistently the winners and other groups more consistently the winners. If the winners more often tended to be, e.g. rich white males, and the losers more often tended to be, e.g. the poor, minorities, and women, I would find this unpalatable. Obviously this is my own bias, that I don’t suspect many of the commenters share (but I could be wrong about that as well). However, I do believe this possibility of systemic bias is what keeps a number of left-leaning folk from fully trusting in this welfare maximizing system. Oddly enough, I’m pretty sure the notion that this bias won’t be in place is what keeps a number of right-leaning folk from taking part. I suppose my question is: If we find ourselves with an opportunity to have a government whose stated intent is to create policies that maximize welfare, would it be reasonable for a person to ask, say, once a year that the sets of winners and losers are by and large ‘randomly’ distributed, and that the losers aren’t disproportionately containing those who tend to have it worse off than others. A yearly meta-analysis that insures the assumed fairness of welfare maximizing against the actual outcomes, with the potential for offsetting corrections (payments), if the losers tended to be people who are already not doing as well. If there were such safeguards in place, how badly could this recursive analysis policy hurt this future utopian effort? Assuming the effect is minimal (as it should be if you’re right about the ‘random’ nature of sets of winners and losers), why isn’t this discussed as an alternative to a purely efficiency based policy?
“some groups more consistently the winners and other groups more consistently the losers”*
Is how that was supposed to read.
I am a pretty simple guy, but I try my best to follow all of these comments. My goal is to be able to explain the benefits of free trade to sincere, smart people who nevertheless seem to fall prey to simplistic protectionist arguments. I have had some success, but it’s been tough.
It seems to me that people seem to focus on what they see as an apparent loss of manufacturing jobs over the past several decades. That seems to be the political issue at hand.
I start by getting them to agree that it would be great if we could find a way to just increase society’s overall wealth. I try to explain that there are actually a couple of ways to do that. 1. An increase in resources we have or 2. To use existing resources more efficiently. (Or a combination of the two). Most people seem to accept that basic logic.
So I create a hypothetical Massachusetts and begin by assuming it cannot trade with any other state. No more orange juice, wheat, gasoline, etc. to enjoy, or if available, these things are very expensive. I find when presented with this, people will quickly admit that free, unfettered trade with other states is a no brainer, and that it results from an increase in available resources. When I point out that those people who might have been growing oranges in greenhouses and charging $20 for a half gallon of orange juice will surely be put out of work, they’ll choose the out-of-state orange juice in a heartbeat. It is then pretty easy to extend the argument to other countries (or expose their bigotry).
That’s the resource argument. I then point out that while free trade might well account for some of the loss in manufacturing jobs, other jobs have also been lost because we can do more with less. I find agriculture provides a convincing way to explain productivity. In 1800 about 72% of the population was employed in agriculture. By 1960 that had fallen to 8%, even while agricultural output was expanding exponentially to meet a ballooning U.S. population, and this was almost all a result of technology. I ask whether they’d prefer to be working on a farm behind a plow all day or doing what they do now. I then point out that the same thing, essentially, has happened in manufacturing. I ask whether we’d really be better off if we were to reverse all the benefits of technology over the past 30 years.
Sometimes they start to get it.
JB: Thank you. Please keep up the good work.
Donald Trump seems to think free trade is a “zero sum” game. Maybe its from all those years owning casinos.